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ED Releases Financial Responsibility Scores

October 21, 2011

The Department of Education released the FY2009-10 financial responsibility scores for nonprofit and proprietary institutions participating in the Title IV financial aid programs last week. Slightly over 10 percent of degree-granting nonprofit colleges on the list posted composite scores lower than the 1.5 needed to be considered financially responsible under ED rules.

ED’s financial responsibility standards (34 CFR 668.171), promulgated in 1997, rely on three ratios to measure the financial health of an institution. These ratios—primary reserve, equity, and net income—are weighted and combined into a single composite score. The composite score can, by definition, be no lower than -1 and no higher than 3. An institution with a composite score of 1.5 or above is considered fully financially responsible. One with a score between 1.0 and 1.4 is placed in the “zone alternative” and subject to heightened scrutiny. A score below 1.0 means that a school has failed the test and must either provide a letter of credit equal to half of the institution’s previous year’s Title IV expenditures, or provide a letter of credit for 10 percent of its previous year’s funds and accept provisional certification.

The table shows the number of degree-granting nonprofit colleges and universities identified in the ED list with composite scores below 1.5 over the last four years. (Note that, for a variety of reasons, the data is not complete: scores were not posted for all institutions in each year.)

   Composite Score FY06-07 FY07-08 FY08-09 FY09-10
   Below 1.0 (failing) 50 70 81 80
   1.0–1.4 (zone) 41 58 70 73
   Total below 1.5 91 128 151 153

 

It comes as no surprise that the downturn in the economy over the last three years has impacted nonprofit college and university scores. The number of institutions with composite scores below 1.5 has increased by more than 60 percent between FY06-07 and FY09-10. However, NACUBO believes that the manner in which ED calculates the ratios has, unfortunately, exacerbated the increase.

NACUBO has raised questions about how ED is calculating the financial responsibility ratios and its treatment of key elements including endowment losses, long-term debt, and pension liabilities. Until recent years, institutions often did not know that the composite score calculated by ED often differed from their own or their auditors’ calculations.
NACUBO has joined a task force convened by the National Association of Independent Colleges and Universities for a broader conversation about these standards and their effectiveness as a measure of financial health and the continued viability of institutions. The task force is expected to make recommendations early next year. When the FY09-10 composite scores were released publicly, NAICU issued a statement providing context and cautioning that a failing score does not mean that an institution is in danger of closing.

Contact

Anne Gross
Vice President, Regulatory Affairs
202.861.2544
E-mail

Sue Menditto
Director, Accounting Policy
202.861.2542
E-mail